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Priority Given to Floating Charge Creditors

The holder of a validly crystallised floating charge will obtain priority over preferential creditor claims during a liquidation. The Supreme Court confirmed this in a judgment delivered by Ms. Justice Laffoy on 9th July 2015. The case arose following the application of the liquidator of a number of companies in the Belgard Motors Group for directions on the priority of payments during the winding up.

High Court Decision

Prior to the Supreme Court decision, in the High Court Ms. Justice Finlay Geoghegan determined:

The Notice of Crystallisation which was served by the bank was technically capable of converting the floating charge to a fixed charge. However, because the debenture did not specifically restrict the debtor company from dealing with the assets following crystallisation it could not be characterised as a fixed charge.

The proper construction of Section 285 (7) of the Companies Act 1963 is that the claims of preferential creditors will rank ahead of floating charge holders’ claims regardless of the fact that the charge has been converted to a fixed charge prior to winding up.

Supreme Court Decision

The liquidator successfully appealed the High Court decision to the Supreme Court.

Ms. Justice Laffoy concluded that the intention of the parties when entering into the debenture was that if a Notice of Crystallisation was served the debtor company would cease to be entitled to use the assets in question without the consent of the charge holder. The Notice of Crystallisation accordingly successfully converted the floating charge into a fixed charge.

The relevant provisions of the Companies Act 1963, which have been re-enacted in the Companies Act 2014, gives priority to preferential claims where the assets are subject to a floating charge on the date the winding up order is made. In this case the floating charge had crystallised prior to commencement of the winding up so the assets fell outside the remit of the relevant Companies Act 2014 provision.

Implications

The Supreme Court pointed out that the outcome of its decision was an ‘unsatisfactory state of affairs’ and of concern because debenture holders can ‘effectively leap frog’ preferential creditors by crystallising their floating charges.

It was noted that the relevant provisions of the Companies Act 1963 have been carried through to the Companies Act 2014 in what Miss Justice Laffoy called a drafting ‘defect’. She suggested that an amendment to the largest piece of legislation ever enacted in the State would be required in order to reverse the outcome of its decision in this case.

While not arising in this case, Ms. Justice Laffoy warned that her decision could lead to contrived ‘false crystallisations’ whereby the debtors are effectively allowed to use the asset following the service of a crystallisation notice as if the assets remained floating charge rather than fixed charge assets.

Conclusion

While this significant decision should be welcomed as a victory for floating charge holders and while it provides some clarity in this complex area, the Supreme Court’s dissatisfaction with the Companies Act 2014 is of note. Going forward this decision could persuade the legislature to make legislative amendments. Any such amendments should be closely monitored by banks.

The Belgard Motors Case provides some clarity in the area of the priority of payments in winding ups.

In this Supreme Court decision it was confirmed that once crystallized, on or before a winding up, floating charges will rank in priority to claims of preferential creditors.

The Supreme Court expressed dissatisfaction with the drafting of the Companies Act 2014 as this decision could now result in debenture holders effectively leap frogging preferential creditors by crystallizing their floating charges.